Ultimate Guide to Corporate Tax in Japan

Starting a business is every entrepreneur’s dream come true. That is, until taxes come into the picture and you’re faced with all these papers, numbers, and whatnot. As daunting as this aspect of business may sound, we’re here to remind you that you’re not alone! Many prospective foreign business owners are also still trying to navigate corporate tax in Japan. To help you, we’ve crafted this article with some things you need to know when doing taxes in Japan as a business owner.

But, why would you need to know all this in the first place? Also known as corporate income tax (CIT), corporate tax in Japan is something you need to learn for financial planning and operations. This will make an impact on your business profitability and possibly investment decisions. It is also important to comply with regulations in Japan to avoid any legal or financial hurdles in the long run.

How much tax will a company have to pay in Japan?

Once the Japanese fiscal year ends, usually on March 31, taxes must be filed and quarterly provisional tax payments must be made. The national rate of corporate tax in Japan is around 23% and an additional 5-10% local tax rate is implemented. The table below summarizes the total tax rate for each bracket of taxable income in Japan according to the Japan External Trade Organization (JETRO).

In computing the total tax rates provided in the table above local corporate tax in Japan, corporate inhabitant taxes, enterprise tax, and special corporate enterprise tax rates have been included. Although this is the case for Japan, how does this compare with other countries? 

To give you a gist of corporate tax in countries aside from Japan, we put together a simple list based on information from PricewaterhouseCoopers. Excluding local taxes from the provided total tax rates in the earlier table, Japan’s national CIT averages 23%. 

Note: The following corporate tax rates are exclusive of local taxes.

1. Singapore: 17%
2. Hong Kong: 16.5%
3. Korea: 24%
4. US: 21%
5. UK: 19-25%
6. Germany: ~16%

Compared to the six countries in the following list, one could say that Japan’s CIT rate of 23% including local taxes is at a relatively moderate level. While higher tax rates may seem daunting at first, there are several reasons behind those numbers! Some reasons behind higher tax rates include government revenue needs, public services and infrastructure, and a country’s economic development goals.

Japan is popular for its advanced transportation system. To add to this, it offers several public services and social welfare programs for its residents. Higher corporate taxes can also be used to support infrastructure and education which boosts an economy in the long run.

How do I prepare to file my corporate tax in Japan?

It’s best to prepare the necessary documents as early as you can. To make sure you’re ready to file corporate tax in Japan, here’s a general list of the requirements and important deadlines!

Required documentation for tax filing

( * = if applicable)

1. Financial reports: Documents such as financial statements (e.g. balance sheets, cash flow statements) and income details
2. Tax-specific documentation: tax return forms, receipts of tax payments made, documentation for claimed deductions or credits
3. Transaction records: invoices, receipts, contracts, records of inter-company transactions*
4. International operations documentation*: both international and domestic companies must provide documents supporting transfer pricing arrangements and/or details of income from foreign operations
5. Other*: Previous year’s tax return

Key deadlines for tax filing

1. Corporate Tax Return Filing: Corporate tax returns must be filed typically within two months after the company’s fiscal year ends. Companies usually align their fiscal year ends with the calendar, which means it ends on December 31st. Under this system, the deadline for corporate tax return filing would be by the end of February.
2. Provisional Tax Payments: These payments are usually due in four installments throughout the fiscal year.
3. In case of special circumstances: In case of unforeseen or exceptional situations such as pandemics or disasters, governments may implement special extensions. For example, the Japanese government implemented the Grace system when COVID-19 hit. This system allowed taxpayers to defer their payments or pay in installments in case the pandemic caused any difficulties in doing so.

To learn more about tax filing deadlines and what you need to do for your corporate tax each year, check out our Q&A with a certified Japanese accountant below :

What makes corporations subject to corporate tax in Japan?

In terms of tax residency, there are two types of corporations subject to corporate tax in Japan; domestic companies and foreign companies. Depending on which classification your business falls under, there may be different circumstances under which your income is taxable.

Domestic Corporations

Domestic companies are defined as corporations that are established under Japanese law or those whose head office is based in Japan. Some examples of domestic companies subject to corporate tax in Japan are the famous Toyota Motor Corporation, Mitsubishi UFJ Financial Group, and Sony Group Corporation.

In such a case, domestic companies are taxed on their global income. This means anything they are earning outside of the country is also subject to corporate tax in Japan.

Foreign Corporations

On the other hand, foreign companies are not established under Japanese law and do not have their head office in Japan. For example, multinational company Hilti may conduct operations within Japan. However, its head office is in Liechtenstein and the company was not established under Japanese law.

For foreign companies, only your income from within the country will be taxable and anything else you make outside the country is excluded from corporate tax in Japan.

We had a Q&A session with Japanese tax accountant Shimpei Wakana. Give it a listen if you’d like to learn more about Japanese accounting!

3 tax rules foreign companies in Japan should not forget

Foreign corporations in Japan are mostly subject to the same rules of corporate tax in Japan that domestic companies abide by. However, we have listed three of the most important rules that we think a foreign business owner in Japan must know about.

1. Permanent establishment
   • Before a foreign corporation can be taxable on income in Japan, it must first have a permanent establishment or PE. This can be done by obtaining a fixed place of business PE, a long-term construction project PE, or an agency PE. By doing so, the corporation is integrated within the Japanese tax system.
2. Double Taxation Agreements (DTAs)
   • To avoid double taxation, Japanese branches of foreign corporations are taxed only on their income within Japan. This is a result of DTAs between Japan and many other countries. As defined earlier, this is applicable if the corporation’s head office is not based in Japan. Otherwise, if the company was founded and has a head office in Japan, then all its income sources are taxable.
3. Transfer Pricing
   • Transfer pricing refers to the prices of products or services that are exchanged between two companies under, say, the same conglomerate. When a foreign corporation conducts transactions with its branch in Japan, strict pricing regulations are implemented. This ensures a fair market value for both parties.

What are some available tax incentives, exemptions, and special considerations under corporate tax in Japan?

Truth be told, corporate tax in Japan must be paid. However, there are countless opportunities to reduce how much you pay! This section of the article will provide you with some incentive programs and other ways to reduce your corporate tax in Japan.

For example, the Green Innovation Fund provides financial support to companies leveraging R&D to tackle specific goals through demonstration to social implementation for the next 10 years. German company Siemens Energy K.K. has been selected for this project. Their goal is to collaborate with their customers and business partners on building sustainable energy systems for the future. 

Another example is Japan’s startup visa. This is one way that the Japanese government is encouraging foreign entrepreneurs to start a business in Japan. With this visa, your designated municipality will provide support for you during the business preparation phase. Fukuoka City, for example, aims to become the top city for foreign entrepreneurs to start their businesses in. Upon obtaining a business or management visa, foreign entrepreneurs in Fukuoka are eligible for an estimated 5 million yen employee or office investment.

In a promotional video for Fukuoka City, we are introduced to Han-san, a Chinese national who was able to secure support from Fukuoka with his startup visa. Han-san’s SMARTI company provides IT solutions and services to bigger Japanese companies. In pursuit of more business partners in Japan, China, and Korea, Han-san found that Fukuoka’s location was ideal. Ultimately, he was able to meet this goal thanks to the support of his municipality.

Want some more tips on how to reduce your corporate tax in Japan? Explore our blog series on how to reduce your taxes!

What is the future outlook of corporate tax in Japan and how can I prepare for it?

New Invoice System

This new invoice system in Japan implies an 80% deduction system which was previously 10%. Under this new system, invoices must now include an additional registration number and six specific items such as invoice issuer name, registration number, transaction details, and client names.

2024 Electronic Record Retention Law

Under the current receipt data-keeping system of Japan, it is required to maintain paper copies of documents for a minimum of 7 years. These hard copies must be provided if requested during tax audits. In case documents are stored digitally, you’ll need to print them out. While this might seem like a hassle for those who dislike paperwork, there’s good news!

From January 2024, eligible businesses can choose to keep documents electronically, and printing hard copies becomes optional. For physical documents like ledgers, receipts, and invoices exchanged on paper, you can decide whether to store them digitally or in hard copy. However, electronic transactions, such as digitally received or sent invoices and receipts, must only be stored digitally. In simpler terms, going forward, all electronic transactions must be retained in digital format.

Reforms on Company Acquisition

The new rules on acquisition imply that one may now purchase shares from a person or entity aside from the original owner of the company. Along with the reduction of the upper limit for acquisition cost down to JPY 5 billion, some conditions must be met to be eligible to acquire shares this way:

1. A minimum total investment cost of JPY 500 million;
2. A minimum shareholding period of 5 years, and;
3. Only domestic companies are eligible as qualified venture companies

Anticipating Policy Changes

Continuous developments may be made in the future. So, we encourage you to stay up-to-date with any news that will be released beyond the time of this article’s writing. Being updated is essential to your business as it will ensure smooth compliance with regulations.

You might be wondering who to rely on to stay up to date on rules and regulations revolving around corporate tax in Japan. Aside from checking the official website of Japan’s National Tax Agency, there are countless other online resources. Advisory and consulting companies such as Deloitte and EY are reputable sources of information on taxation and audit consulting.

Final Thoughts

Corporate tax in Japan has complex layers that may overwhelm taxpayers, especially foreign business owners. However, as daunting as it may seem, the internet is no short of support and resources available to guide you through it. 

This article has provided you with a brief foundation to understand the system in Japan and some key resources you can access online. By diligently using all the provided material to your advantage, you will be able to keep your business on track! Keep in mind that staying informed and proactive on all things tax is also crucial. You can keep up with reforms by accessing websites such as Deloitte and EY.

Complying with regulations, fulfilling requirements, and beating deadlines will become a breeze once you get the hang of corporate tax in Japan. That being said, why not work with an accountant to accompany you through it all? We strongly recommend looking into Match.points for accounting and financial advisory support from certified public accountants.

If you’re seeking broader assistance in scaling your business in Japan, our team is just an email away. We’re here to offer support and guidance tailored to your unique business challenges and goals. Remember, with the right approach and support, you can transform the complexity of corporate tax in Japan into a manageable and even advantageous aspect of your business strategy!